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HP-COMPAQ

MERGER

Chris Althoff, Megan Jones, Paul Gavin,


Jennifer Noinaj, Scott Shapiro
BADM449 11/12/2009

AGENDA
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Background
Porter's 5 Forces
HPs Competitors
SWOT Analysis
Stakeholder Analysis
Merger Pros
Merger Cons
Result
HP Today
Recommendations

INDUSTRY BACKGROUND

Fueled by competition and changing


market
New product introductions and
improvements
Firms had to keep pace to be
successful

PORTERS FIVE FORCES


Threat of New Entrants (Barriers to Entry): (Moderate)
PC market developing computing equipment

Product differentiation

Transferring files
Standardization of most computer components

Access to distribution channels

Rapid moving industry


Technology constantly improving

Moderate customer switching costs

Economies of scale
Low capital requirements

High for direct-to-customer


Internet & computer retailers

Expected retaliation from existing firms

PORTERS FIVE FORCES


Bargaining Power of Buyers: (Low)
Switching costs are high
Low number of suppliers
Suppliers operate with high fixed costs
Bargaining Power of Suppliers: (High)
High number of customers who are
fragmented
A few larger suppliers (Foxconn, Intel, Hitachi)
Difficulty re-producing specialized technology.

PORTERS FIVE FORCES


Threat of Substitutes: (Moderate)
Switching costs for consumers would be high
Frequent product introductions and continuous
improvements in price
Rivalry: (High)
High Fixed costs
Barriers for exit are high
Constant changes to products and price
Two big players hold the top two market share spots in
the computer hardware industry.
IBM
Dell

COMPETITORS - IBM

Strong R&D and marketing


Gave rise to PC industry with Microsoft
Windows OS
IBM Global Services strong customer
assistance
Created a conflict of interest

COMPETITORS - DELL

Direct business model


Low inventory costs, introduce new
technology quickly
Dell.com
Close customer relationships built
loyalty
Ranked #1 in global PC market share
in 2001

COMPETITORS - COMPAQ

Highly successful early on with leadingedge technology


Trend-setter price strategy in early 90s
Dealer network for sales, later Internet
sales
Acquired Tandem Computer and Digital
Equipment Corporation
Revenue increased but high merger
expenses and heightened competition

HP HISTORY

Founded in 1939 by William Hewlett


and David Packard
87,000 employees, 120 countries
Drive to be industry leader in every
category
Actively expanded into new markets

HP HISTORY

Late 90s brought innovation, but low sales


growth
Trouble keeping up with changing market
CEO retires, name Carly Fiorina as new CEO
Focus on customer and Internet sales
Revamped organizational structure
Front-end supported by strong back-end

HP PRODUCTS

3 Major Business Segments

Imaging and Printing Systems

Computing Systems

1st in global printer market in 2001


4th in PC and server markets in 2001

Information Technology Services

8th in global services market in 2001

HP PRE-MERGER

Experienced revenue growth but share


price still declined
Faced recession in 2001
Pay cuts and layoffs
Stock price continued to fall
Began to consider acquisitions

SWOT ANALYSIS
Strengths:
Compaq-Server category and overall storage
HP-High-end storage
Strong brand recognition
Weaknesses:
Developing a direct distribution model
Consulting and outsourcing (low market share)
Compaq-Printers (low market share)

SWOT ANALYSIS
Opportunities:
Merger could improve economics and innovation

Economies of scale

Strengthen leadership in storage


Market growth in IT services

Threats:
Dell increases pressure in the low-end server
market
IBM, Dell and new entrants erode more market
share

STAKEHOLDER ANALYSIS
Focus on the primary stakeholders:
Competitors
Public
Customers
Shareholders

STAKEHOLDER ANALYSIS

Competitors

IBM, Sun, Dell


Cost savings by HP

Public and Customers

Allows HP to reach more people


Adds Compaqs stable of customers

Tap into Compaqs positive image

Could potentially entice new investors

STAKEHOLDER ANALYSIS SHAREHOLDERS


Compaq stock and HP stock struggling
HP executives believed mergers cost
savings would become a huge asset for
HP
Dissenters to this notion form

Walter Hewlett

HP-COMPAQ MERGER DISSENT

Walter Hewlett: Son of HP co-founder


and current HP director

Packard Foundation

Controlled the Trust and the Foundation


which owned 5.9% HP stock
Largest HP shareholder: 10.4% HP stock

Both conduct independent analysis of


proposed merge and decide to vote
against

MANAGEMENTS REASONS FOR


MERGER
1.
2.

3.

4.

Improved Economics and Innovation


Complementary Leadership in Key
Markets
Strengthened Business Provides
Critical Mass in Key Growth Market
Financial Benefits

1. IMPROVED ECONOMICS AND


INNOVATION

Combined company creates economies


of scale
Direct sales channel
More flexible distribution model

2. COMPLEMENTARY LEADERSHIP IN
KEY MARKETS

Industry leading product line in entire


server category
Industry leader in enterprise storage
segment and storage area networks
Broader portfolio of products and
services

3. STRENGTHENED BUSINESS
PROVIDES CRITICAL MASS IN IT
SERVICES

65,000 IT architects in 160 countries

Accelerates growth

Better customer loyalty


Leading position in managed services,
mission-critical services, and
multivendor support

4. FINANCIAL BENEFITS

Estimated $2.5 billion in annual cost


savings by mid-2004
Would allow HP to increase investment
in the imaging and printing business

REASONS AGAINST THE MERGER


1.
2.

3.

4.

HPs Business Portfolio Will Be Worse


The Integration Risk of the Proposed
Merger is Substantial
Negative Financial Impact on HP
Stockholders
HPs Strategic Position Will Not
Materially Improve

1. HPS BUSINESS PORTFOLIO WILL


BE WORSE

Increased exposure in unprofitable PC


business
Imaging and printing segment was
expected to grow over 10% per year
PC market was expected to shrink

2. THE INTEGRATION RISK OF THE


PROPOSED MERGER IS
SUBSTANTIAL
No significant merger involving

computer companies had ever met


expectations
HP management had no experience
with a merger this large
Analysts estimated revenue losses
could be as high as 15-17%

3. NEGATIVE FINANCIAL IMPACT ON


HP STOCKHOLDERS

Dramatic drop in stock price after


proposed merger was announced
Wall Street predicted low estimates for
future financial performance

4. HPS STRATEGIC POSITION WILL


NOT MATERIALLY IMPROVE

Neither company had a profitable PC


business model
Neither company had successfully
transitioned to a direct distribution
model
Merger would not materially improve
HPs market position in high-profit
areas

SO, WHAT HAPPENED?

51.4% shareholder approval margin

Showed a high level of uncertainty

Supporters felt it was the best option


available for the two firms
Critics against the merger voiced
opinions about the future strategy and
the riskiness of large mergers

HP TIMELINE (2004 2006)


2004

Digital entertainment products Plasma & LCD TVs, HP Digital


Entertainment Center (management of music, movies, photos)

Acquired Riverstone Networks, Ethernet routers, for $28 million

Acquired Synstar, independent provider of IT services, for $293.3 million


2005

Acquired Snapfish, online photo service company

Acquired Scitex Vision, industrial wide-format digital printing


2006

Acquired VoodooPC, high-end gaming PC provider

Acquired Mercury Interaction, IT management software and services


company

Legal investigations board members leaked confidential information to


media

Formal inquiry from Securities and Exchange Commission

Shareholder lawsuits

HP TIMELINE (2007)
2007

HP & Wataniya Telecom Algeria advanced billing solution to support


new mobile services

Established research lab in St. Petersburg, Russia (growing economy)

Expansion of printing, PC & software businesses

Removed itself from NASDAQ listing to reduce the cost of fees and
admin duties

Filed patent infringement lawsuits against Acer

Filed Print cartridge and ink formulation patent infringement case


against Pelikan Hardcopy

Awarded 7-year contract for technology services with NASA worth


$5.6 billion

Entered into agreements with 30 content providers for their media


libraries (4,000 movies, TV, films, etc) for production & distribution
through HP Video Merchant Services

HP TIMELINE (2008)
2008

HP & Unilever signed a 7-year outsourcing contract for the


management of Unilevers technology infrastructure

Sara Lee renewed its infrastructure outsourcing services contract for


7-years and from 10 countries to 35

HP & Foxconn started constructing a manufacturing facility in Russia


for the production of HP PCs with an investment of $50 million

Created HP & Novell alliance for identity and security management


solutions HP sells Novell products, Novell manages technology

HP & Acer resolved all claims between them

New radio frequency identification (RFID) technology to secure and


improve audit controls in the data center

US Air Force contract for desktop, laptop, and services

Joined with Intel & Yahoo, created a cloud computing research and
education data center

Acquired Electronic Data Systems Corp (EDS), global technology


services, for $13.9 billion

HP TIMELINE (2009 PRESENT)


2009

HP & Sun Microsystems agreement HP to distribute and provide


software support for Suns OS on HPs server

10-year contract with Avivia (insurance) to manage 2 data centers for


$1 billion

12-year contract with British Columbia Ministry of Labour and


Citizens Services for hosting and data center services for $586
million

11/11 Acquires 3COM, global enterprise networking solution, for


$2.7 billion

HP TODAY

Total Revenue: $118,364 million (2008)

Net Income: $8,329 million (2008)

13.5% growth over prior year


14.7% growth over prior year

CEO: Mark Hurd

Started on April 1, 2005

HP MARKET SHARE

Leading global PC market for shipments

Leading global server market

EMC, HP (2008)

IT services

40% market share in 2008


Competitors: Xerox, Canon

Storage market

47% HP, 26% IBM (2008)

Leading global printers market

30% market share in 2008

Leading blade servers segment

2006 Took market leadership from Dell


18% HP, 14% Dell, 11% Acer, 7% Lenovo (2008)

2nd largest player (EDS acquisition in 2008)


Competitors: Accenture, IBM

Branding

#12 in Top 100 Best Global Brands (Interbrand, 2008)


#1 in US, #10 in world for Environment, Social Impact Ratings (The Economist,
2008)

HP STRUCTURE NOW

7 business segments

Technology Solutions Group

Enterprise Storage and Servers (ESS)


HP Services (HPS)
HP Software

Personal Systems Group (PSG)


Imaging and Printing Group (IPG)
HP Financial Services (HPFS)
Corporate Investments

PC SHIPMENTS FOR 3Q09 (US &


INTL)

Source: IDC Worldwide, Quarterly PC Tracker 10/09

GROWING INDUSTRY TRENDS

Enterprise mobility

Web & video collaboration

Services offered over the Internet


Cloud computing market: 40% growth rate
23% share of the software market by 2010
>$40 billion by 2012
63% of companies by 2010

Business intelligence, Web 2.0, data mining


Security, risk, compliance
Energy-efficient data centers

Virtualization: 50-60% of all servers


Eliminates energy costs, maintenance, cooling expenses,
and data center costs by as much as 90%

RECOMMENDATIONS

Consumer trends

Enterprise trends

Media & entertainment growth


Manufacturing green servers, acquiring
analytics companies, SaaS options

Diversify portfolio

Tap into videoconferencing potential


agreements with Tandberg systems

QUESTIONS?